Is Turkmenistan the Next Central Asian Tiger?

The country has been authoritarian and isolationist, but its reforms are beginning to show promise.

By Nicola Contessi for The Diplomat

July 15, 2014

While we are long accustomed to hearing about the prowess of Kazakhstan’s oil-driven economy, or Uzbekistan’s assertiveness as the self-anointed regional leader, Turkmenistan rarely makes any news, except in the negative. Indeed it has a reputation, earned mainly under former President Separmurad Nyazov, as an authoritarian fortress insulated from the outside world. However, Turkmenistan is shaping into a country whose potential is unparalleled in the region, thanks to a series of fortunate measures adopted in recent years. Ashgabat is seeking to develop today its energy and transport potential and modernize the economy by introducing selected reforms, in a way not dissimilar to what other regional countries have done much earlier.

Energy

Ashgabat’s approach has three pillars: pipelines, extraction of hydrocarbons, and electricity generation.

While until 2009 the country depended on Russia almost exclusively, Turkmenistan today enjoys the most diversified set of pipelines in the region, with three different export routes. The first remains the Central Asia-Center pipeline to Russia and Europe. A second route links it to Iran thanks to the Korpezhe-Kurt Kui and since 2010 the Dauletabad-Sarakhs-Kargan line. The two pipelines reach a combined capacity of 20 billion cubic meters (bcm) of gas per year. But the third and most important route is the China-Central Asia Pipeline, destined to supply more than 40 percent of China’s gas by 2020 – the equivalent of 80 bcm per year. Its first two lines became operational in 2009 and 2010 respectively, and the third line started pumping in June 2014. Line D, the fourth section, is scheduled to be ready by 2016/17.

A (long-delayed) fourth route – the 1,735 km TAPI pipeline for a cost of $7.6 billion – is making progress coordinated by the Asian Development Bank (ADB). Turkmenistan will begin work on its section in 2015 and the pipe should be online by 2017/18. On top of that, Ashgabat is also completing a domestic East–West pipeline, to carry up to 30 bcm of gas to the Caspian Sea, for shipment to Azerbaijan and, from there, to Turkey and Europe through the Baku-Tbilisi-Ceyhan pipeline.

Thus, learning from Kazakhstan’s playbook, Turkmenistan has given new meaning to the mantra “happiness is multiple pipelines.” With a client portfolio now including China (52 percent), Iran (22 percent) and Russia (24 percent), Ashgabat has reduced dependence on Russia to only 10-15 bcm per year: an almost fourfold decline from earlier levels of 40-45 bcm. The additional pipelines currently under construction will only improve the country’s position.

In 2012, the Central Asia-China pipeline pumped 21.3 bcm of Turkmen gas, a volume that Ashgabat has committed to increase to 65 bcm per year by 2020. TAPI will deliver about 33 bcm per year, with Pakistan and India getting about 42 percent respectively as per a May 2012 Agreement. A subsequent Turkmen-Afghan deal stipulated that Afghanistan will purchase 500 million cubic meters of gas in the first decade of operation, 1 bcm in the second and 1.5 bcm in the third. To satisfy its multifaceted commitments, Ashgabat anticipates boosting gas output to 230 bcm by 2030, 180 of which it will export. Turkmenistan currently produces 80 bcm of gas per year and has proven reserves for 32 trillion cubic meters.

But Turkmenistan is also course to develop estimated oil reserves of 12 billion tons (600 million barrels proven), divided into 32 license blocks along its Caspian sector. Investments totaled $2.5 billion in 2013 and are set to exceed $3 billion in 2014, with five of those licenses going to foreign groups on production sharing contracts (PSC). Lastly, the Turkmen government is investing $5 billion in the electric industry, targeting generation capacities of 27.4 billion kilowatt/hours by 2020 and 35.5 billion kilowatt/hours by 2030.

Transport Diplomacy

While existing in a landlocked region, the country has stepped up efforts to end its decades-long, self-imposed isolation. As signaled through an unprecedented international conference hosted in Ashgabat in 2012, Turkmenistan aspires to position itself as a major Silk Road hub. The country accessed CAREC (Central Asia Regional Economic Cooperation) in 2010, and the Basic Multilateral Agreement on International Transport for Development of the Europe-the Caucasus-Asia Corridor in 2013: two steps that will boost the country’s integration with intercontinental transport corridors.

To this end, it established a strategic partnership with China in 2013, and pursues privileged relations with Turkey in the name of their common heritage.

Following the signing of the China-Turkmenistan Friendly Cooperation Agreement, China and Turkmenistan will give priority to Beijing’s Silk Road Economic Belt initiative in the period 2014-2018. With Turkey, Ashgabat is eyeing the conclusion of an extensive free trade agreement by 2015 to boost bilateral trade of $5 billion in 2013. The two countries have formed a “Turkic trilateral” with Azerbaijan, intended to open a southern route across the Caspian Sea in the new Silk Road. To this end, Turkish companies are building a $2 billion seaport at Turkmenbashi, assorted with a container terminal, a distribution center and shipyards. Lastly, the construction of the Turkmenistan-Afghanistan-Tajikistan railway broke ground in June 2013, not before the May opening of the Etrek to Ozen (Kazakhstan) railway – a line that will eventually link up to the Iranian network. Ashgabat will pay for the 90 km section on its territory and for the 35 km link to Andkhoi in northern Afghanistan, while the ADB and the Islamic Development Bank will cover the rest of the $2 billion investment.

To be sure, the country can be the hinge between Central Asia and both the Middle East and South-Eastern Europe. Its centrality in both China’s and Turkey’s Silk Road strategies gives it the unique opportunity to link these two poles, a role that the new Turkmenbashi seaport can clearly enhance. Moreover,by connecting Afghanistan and Tajikistan, Turkmenistan can increase its regional leadership by both contributing to Afghanistan’s recovery and helping Dushanbe defuse its frictions with Tashkent. Following the trilateral railway agreement, the three are eyeing an analogous scheme for the transport of electricity from Turkmenistan to Tajikistan through northern Afghanistan.

Reforms

A further facet in Ashgabat’s modernization bid is the adoption of reforms to create a more competitive economy. Having adopted a new constitution in 2008, Ashgabat has embarked on a set of reforms aimed at transforming the country into a market economy.

Its National Program for Socioeconomic Development 2011-2030 has adopted the goals of diversifying the economy and improving living standards through stronger institutions, agricultural reforms, synergies between the public and private sectors and integration with the global economy. Moreover, in January 2013 the government instituted a commission for WTO accession and is eying privatizations in the transport, construction and communications sectors.

The most symbolic measures taken to date have been the termination of residential gas subsidies that had been in place since 1993, and of the 120-liter monthly petrol allowance. Other major reforms have affected the education system, the criminal code and the tax administration. A new round of constitutional reforms that foresee greater human rights guarantees and self-government prerogatives is being undertaken to introduce international standards and reflect the country’s “sociopolitical transformations.”

While some observers have greeted Turkmenistan’s latest reform efforts with skepticism, there is reason to believe its undertakings are serious, as they are confirmed by engagements with international actors, and are increasingly visible in a consistent pattern of tangible outcomes.

Enduring Challenges

The considerable growth that the country is set to experience in coming years will create opportunities, but will inevitably also pose political and institutional challenges.

Though Turkmenistan is already a middle-income country, the sheer magnitude of its export targets could greatly improve the country’s outlook. However, the economic boon can also have a disruptive effect. The massive inflow of revenue will critically test the country’s institutions, in terms of transparency, governance effectiveness and economic planning. This in the context of polities with limited political and legal accountability: Turkmenistan ranked 168th out of 176 countries on Transparency International’s 2013 Corruption Perception Index, 171st out of 178 on the 2014 Heritage Economic Freedom report (was 168th in 2012), and is absent from the WB’s Doing Business. Therefore, the reforms already implemented will require more work to craft not only an attractive economy and jurisdiction, but also accountable political institutions. In this respect, it will be interesting to see how far Turkmenistan will go with its constitutional reforms.

In terms of security, Turkmenistan remains vulnerable to spillovers from neighboring Afghanistan. As Bruce Pannier has reported (here, here, here and here), Turkmen security forces have been involved in regular hostilities with Taliban combatants for some time, and three border guards were shot dead in February while a bomb was found in the village of Marchak. Moreover, the identification of Turkmen recruits amid the Taliban in the Jowzjan and Faryab Afghan provinces and even in Syria has created some alarm. The problem is partly self-made: taking advantage of soil erosion on the southern bank of the Amu Darya, Turkmenistan has sought to push its border into Afghan territory. Contested sovereignty thus creates a breeding ground for radical elements, and though Turkmenistan is seeking ethnic allies in Afghanistan to act as a buffer, there is a growing sense that the country’s security services are ill equipped to contain the Taliban once ISAF forces withdraw.

As the transformations the country has been pursuing come to fruition, Turkmenistan is likely to experience significant economic growth. Over the next 10-15 years, the national energy sector should generate windfall revenues, and IMF forecasts confirm a positive outlook for Ashgabat. With a relatively fresh and still young president, the country doesn’t face a pressing succession dilemma. Barring exceptional fluctuations in global commodity prices, Ashgabat’s success will therefore depend primarily on its ability to continue to follow the path of reform and investment in the natural resources sector. Moreover, recent deals to build gas-processing plants through South Korean joint ventures suggest the government’s interest in using international partnerships to enter value-added markets. However, if Ashgabat does not show adequate resilience, border porosity could pose serious problems from a post-withdrawal perspective.

Nicola Contessi is a postdoctoral research scholar and lecturer at Columbia University.